Sunday, October 13, 2013

There was a time, not that long ago, when if I was short of a topic for a post, I could Google “Gazprom” and there was sure to be a story out there about another expansion, or take over of a national pipeline – or some other sign of the companies growth and power. But in the natural gas industry there has always been a certain volatility. In the United States Chesapeake, the second-largest natural gas producer in the US, is laying off 800 workers as it completes its plans to re-organize by the end of the month. The price for natural gas is around $3.79 per kcf which still falls below the price required to make many wells in tight shale adequately profitable. I have written about gas price problems a number of times in the past, dating back to at least 2009 and though the price is now up over $1 per kcf from those times, as the recent report in the OGJ noted, Chesapeake had, in estimating returns, anticipated it would be up around $7.21.

Gazprom’s problems however relate more than just to the price of natural gas, and the continuing difficulties in defining future price, although those too still exist. In the agreement that the company signed with China last month, for example, although it says:

All the major terms and conditions of future Russian natural gas supplies to the Chinese market via the eastern route were agreed on, namely, the export volume and starting date, the take-or-pay level, the period of supply buildup, the level of guaranteed payments, the gas delivery point on the border as well as other basic conditions of gas offtake. The price conditions will not be linked to the Henry Hub index.

It turns out that the price has yet to be determined. Gazprom is expected to sell its gas into Europe this winter at around $10.62 per kcf, which is down about 7.5% over last year. Nevertheless the Chinese are hoping to pay no more than $7.10 per kcf. And they have more than a little leverage.
Gazprom had been hoping to market the liquefied natural gas (LNG) from the ExxonMobil fields at Sakhalin Island as well as from their own wells, but that discussion has now fallen through so that this becomes a competitive rather than complimentary source of supply. Concurrently China has just confirmed the increase in purchases of natural gas from Turkmenistan.

Not that many years ago all the exported natural gas from Turkmenistan had to run through Gazprom pipes, and thus the company could charge a hefty premium in carrying the gas to Europe and elsewhere. With the opening of pipelines from Turkmenistan to China, that monopoly disappeared, and now the Chinese have agreed to take some 2.3 trillion cubic feet (Tcf) (65 billion cubic meters) of Turkmen natural gas per year, increasing their take by 882 bcf and requiring an additional pipeline to carry this new volume. Given that the country already supplies over half of Chinese natural gas imports, this will continue to squeeze Gazprom’s ability to control prices in Asia.

This new volume will come from a new field in Turkmenistan, the Galkynysh, which is expected to hold a reserve of 900 Tcf. China is investing $8 billion in the development of the field, and the new pipeline to China.

Figure 1. The location of the Galkynysh field within Turkmenistan (Trend)

And Gazprom’s problems don’t end in Asia. Part of the problem that they ran into at Sakhalin Island is that ExxonMobil is working with Rosneft to build an LNG plant through which to market their product by tanker. This circumvents the pipeline monopoly which has allowed Gazprom to dictate terms in the past. The plant is expected to handle 5 million tons of LNG per year, and is anticipated to come on line in 2018. Initial construction contracts have now been signed.

Roseneft, and Novatek have both now been given permission to export LNG, overturning the Gazprom monopoly, and Novatek has the deposits in the Yamal Peninsula that could be more conveniently marketed to Europe, but with LNG tankers that could also reach Asia and beyond. The natural gas will initially come from the South Tambeyskoye field, which has an anticipated reserve of 17 Tcf, with an expected production of around 1 Tcf per year.

Figure 2. Location of the South Tambeyskoye natural gas field, and the planned site of the LNG plant (Novatek )

The plant will operate three trains, each with a capacity of some 5 – 5.5 mmt. It is perhaps no surprise that China is backing the plan with a 20% investment, for which it anticipates being able to purchase at least 3 million tons of LNG pa. An additional 10% of the funding is likely to come from either Japanese or Indian investors. Total of France also has a 20% investment and presumably will gain a proportionate share of the shipments.

As if these challenges to Gazprom’s dominance were not enough trouble, Gazprom is seeking to have two German companies EON SE and BASF SE pony up another billion dollars because Gazprom has been able to increase the reserves at the Yuzhno-Russkoye field in Siberia.

And just to rub it in, the European Union is planning on hitting the company with anti-trust charges. Given that the company has been able to dominate natural gas sales into Europe though pipelines, and thus has also been able, in the past, to control prices, this new step could prove expensive to the company, just as it faces greater competition in all its export markets. (This does not even consider the potential for LNG competition out of the United States).

The company is getting its supplies from increasingly expensive locations (hence the need for the cash from the German companies) and the income losses that it has seen in the market due to Turkmen competition are already hurting – but it needs more money if it is to be able to keep up its market share.

Figure 5. Process gain in refineries around the world and in the United States (Peak Oil Barrel )

The plot is at the end of a discussion on the difference between counting all the oil produced in a country and the break-down into crude and other sources that add into the total. One part of this is the gain in volume, process gain, that comes when crude is refined. It therefore acts as a marker of the volume of crude that is running through refineries, and as Ron notes, this has now plateaued for the past few years. Interesting!!!

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Waterjetting Index

After writing about Waterjet Technology for a couple of years at this site I have created an index, hopefully this will be updated monthly and can be found at: Waterjet Index .

The Archive of Oil and Gas and Coal Posts

About ten years ago I began to write a blog, and after a time that transformed into co-founding The Oil Drum. Move on a few years, and at the end of 2008 I turned from being an editor there to this blog, although the OGPSS series continued to be posted, on Sundays, at TOD as their weekly Tech Talk. Some of the industrial technical descriptions of oilwell formation and coal mining are relatively timeless and useful, and so are listed below.

Along the way I became similarly cynical about some of the facts being bruited about Climate Change, and did a little study, which is documented here as the State Temperature Analysis Series. It showed that the UHI is real and that there is a log:normal relationship between population and temperature (which is also related to altitude and latitude). You can read the individual state studies, which are listed below. There will still be the occasional post on this topic.

Just this last year I was asked to write a weekly blog on the application of High-Pressure waterjetting – which is the subject that I specialized in for four decades.That too is now, therefore, a part of the contribution.

And, in my retirement, I have become curious about Native Americans and what they looked like.And so I am now learning Poser and related programs, and may inject both posts and the odd illustration – helped by the many real artists who work in that medium, as I read and try and comprehend what went on in the depths of The Little Ice Age (around 1600 – 1700).

Because I am a Celt, there will also be the odd post on my lineage and some of the DNA studies that relate to history.

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Units and Conversions

One of the problems in following stories in different countries is that they use different units and symbols. This can be a bit confusing, and so, where I can, I will try and standardize on the unit of barrel/day, or bd for oil. I will also use a thousand cubic ft kcf for natural gas. Prices will also be standardized, when I can, in $/kcf for natural gas, $/barrel for oil, and $/gallon for gasoline.

In larger units volumes a thousand barrels a day becomes 1 kbd and a million barrels a day becomes 1 mbd. For natural gas a million cu ft per day will be 1 mcf. (In many quotes this has appeared as 1 MMcf).

A billion cu. ft. is 1,000 mcf. Note that a cubic foot of gas produces 1,030 Btus - so to simplify 1 million Btu's is approximately 1 kcf, or 28.3 cu.m. of natural gas equivalent.

A ton of oil is 7.33 barrels. (Mainly used in Eastern Europe).

Since not all posts before this show these units - note that this change happened on March 3, 2009.